Rosenthal & Rosenthal, Inc. v. Benun
| Citation | 441 N.J.Super. 184,117 A.3d 191 |
| Decision Date | 17 June 2015 |
| Docket Number | DOCKET NO. A-2890-13T3 |
| Parties | ROSENTHAL & ROSENTHAL, INC., Plaintiff–Respondent, v. Vanessa BENUN a/k/a Vanessa Broochian and Elan Broochian, Defendants, and Riker, Danzig, Scherer, Hyland & Perretti, L.L.P., Defendant–Appellant. |
| Court | New Jersey Superior Court — Appellate Division |
Gerald A. Liloia argued the cause for pro se appellant (Nicholas Racioppi, Jr., of counsel; Matthew H. Lewis, Morristown, on the brief).
Joshua A. Zielinski argued the cause for respondent (McElroy, Deutsch, Mulvaney & Carpenter, L.L.P., attorneys; Mr. Zielinski and Peter Saad, Newark, of counsel and on the brief).
Before Judges FUENTES, ASHRAFI, and O'CONNOR.
The opinion of the court was delivered by
ASHRAFI, J.A.D.
In this foreclosure action, defendant-mortgagee Riker, Danzig, Scherer, Hyland & Perretti, L.L.P., (Riker) appeals from summary judgment granting priority to the two earlier, recorded mortgages of plaintiff-mortgagee Rosenthal & Rosenthal, Inc. (Rosenthal). The Rosenthal mortgages secured not only existing debts guaranteed by defendant-mortgagor Vanessa Benun but also future advances Rosenthal would make in its discretion to the debtor. Riker argues that the Chancery Division incorrectly applied the common law of optional future advances secured by a mortgage. We agree and reverse.
Both parties filed motions for summary judgment. The pertinent facts are essentially undisputed. Our standard of review is plenary on the application of law leading to summary judgment where no genuine issues of fact are in dispute. Nicholas v. Mynster, 213 N.J. 463, 477–78, 64 A. 3d 536 (2013) ; Zabilowicz v. Kelsey, 200 N.J. 507, 512–13, 984 A. 2d 872 (2009).
Riker is a law firm. Rosenthal describes itself as “an international financial institution engaged in providing businesses with ... traditional factoring services, which involves businesses selling their accounts receivable to Rosenthal, in return for cash to satisfy their immediate cash flow needs.” See also 35 C.J.S. Factors § 1 (2009) (). Both Riker and Rosenthal are creditors of Jack Benun or the camera sales businesses that were owned by the Benun family, which we refer to in this opinion as “the Jazz entities.”
On July 12, 1995, Rosenthal entered into a factoring agreement with one of the Jazz entities, Jazz Photo Corporation (Jazz Photo). Paragraph 7(b) of the 1995 factoring agreement provided that Rosenthal, “will advance to” Jazz Photo “at [Rosenthal's] discretion, up to seventy percent (70%) of the net amount of receivables purchased by [Rosenthal] and not as yet collected.”
On August 18, 2000, defendant Vanessa Benun, who is Jack Benun's daughter, executed an agreement by which she guaranteed to Rosenthal payment of all obligations, liabilities, and indebtedness of Jazz Photo. Vanessa Benun also executed a mortgage and security agreement (the 2000 mortgage), encumbering real property she owned on Ivy Place in Ocean Township. The 2000 mortgage included a “dragnet clause,” which secured Vanessa Benun's obligations under the guarantee up to a maximum principal amount of $1,000,000.1
The 2000 mortgage also contained an “anti-subordination clause,” which stated that Vanessa Benun “shall not further mortgage or amend, modify, restate or amend any existing prior mortgage or otherwise encumber the Premises, or any part thereof.” The 2000 mortgage was recorded in the Monmouth County Clerk's Office on August 21, 2000.
On March 8, 2005, Rosenthal entered into a second factoring agreement with another of the Jazz entities, Ribi Tech Products, LLC (Ribi Tech). Paragraph 7.2 of the second factoring agreement stated that in its “sole discretion,” Rosenthal “will, from time to time ... advance to [Ribi Tech], sums” up to a maximum calculated as a fixed percentage of outstanding “Eligible Receivables” or “Eligible Inventory.”
On March 15, 2005, Vanessa Benun executed another agreement by which she guaranteed to Rosenthal payment of all obligations, liabilities, and indebtedness of Ribi Tech. Vanessa Benun also executed another mortgage and security agreement (the 2005 mortgage), further encumbering the Ivy Place property, again in the principal amount of $1,000,000. The 2005 mortgage contained the same dragnet and anti-subordination clauses as the ones in the 2000 mortgage. The 2005 mortgage was recorded in the Monmouth County Clerk's Office on April 13, 2005. At some point, Ribi Tech changed its name to Jazz Products, LLC (Jazz Products).
On March 25, 2007, Vanessa Benun executed a mortgage in favor of Riker (the Riker mortgage) on the same Ivy Place property. The purpose of the Riker mortgage was to secure payment of outstanding legal fees totaling $1,679,701.33 owed to Riker as of that date by Jack Benun. The Riker mortgage was recorded in the Monmouth County Clerk's Office on April 13, 2007.
On August 3, 2007, Rosenthal's counsel sent an e-mail to Riker that took notice of the Riker mortgage. Counsel wrote: 2
On September 8, 2009, Jazz Products filed for bankruptcy. The next day, Vanessa Benun executed a third agreement by which she guaranteed to Rosenthal payment of all obligations, liabilities, and indebtedness of Jazz Products as a debtor in possession.
Pursuant to paragraphs 7(b) and 7.2 of the 1995 and 2005 factoring agreements, Rosenthal continuously disbursed and collected funds from the sale of accounts receivable of the Jazz entities, at the same time charging the Jazz entities fees, commissions, and other charges referenced in the agreements. It also made advances to the Jazz entities every month between June 2006 and August 2009. Once Jazz Products filed for bankruptcy, Rosenthal declined to make additional disbursements and advances except for a few that were intended to complete the bankruptcy liquidation process. Jazz Products defaulted on the factoring agreements by failing to make the required payments. As of March 2012, Jazz Products and Vanessa Benun owed Rosenthal $3,986,724.19.
After Riker recorded its mortgage in April 2007, it also continued to perform services for Jack Benun. In April 2013, at the time of the motions for summary judgment, Jack Benun owed Riker more than $3,000,000 in legal fees.
To recapitulate, Rosenthal had two mortgages on the Ivy Place property recorded in 2000 and 2005, and Riker had a subsequent mortgage on the same property recorded in 2007. The value of the mortgaged property was not sufficient to secure the debts owed to both Rosenthal and Riker.
In April 2012, Rosenthal filed a complaint of foreclosure against Vanessa Benun, her husband Elan Broochian, and Riker. Vanessa Benun and Elan Broochian did not respond to the complaint, and Rosenthal filed a request to enter default judgment against them. Riker answered the complaint and pleaded affirmative defenses, including that its 2007 mortgage has priority over Rosenthal's 2000 and 2005 mortgages. In February 2013, both Rosenthal and Riker filed motions for summary judgment on the priority issue.
On April 26, 2013, the Chancery Division granted Rosenthal's motion, struck Riker's answer with prejudice, and entered default against Riker as if no answer had been filed in the foreclosure action. The court then remanded the matter to the Office of Foreclosure. On February 20, 2014, a final judgment in foreclosure was issued, which ordered “the mortgage premises be sold to raise and satisfy the several sums due, in the first place, to [Rosenthal] in the sum of $2,613,972.60 as of January 13, 2014....” Riker filed a timely Notice of Appeal challenging the priority granted to Rosenthal by the court's April 26, 2013 order.
Relying on the law of mortgages that secure future advances, Riker argues its later-recorded mortgage has priority over the optional advances Rosenthal made to the Jazz entities after Rosenthal had actual notice of the Riker mortgage. In response, Rosenthal relies on the sequence of the recordings and on the concept of “first in time, first in right” to argue for its priority over the Riker mortgage.
“Future advance mortgages typically provide that ‘the property encumbered by the mortgage stands as security not only for the funds advanced at the time the mortgage is executed and delivered, but also for any obligations incurred after the initial advance.’ ” Cox v. RKA Corp., 164 N.J. 487, 524, 753 A. 2d 1112 (2000) (Stein, J., concurring in part and dissenting in part) (quoting James B. Hughes, Future Advance Mortgages: Preserving the Benefits and Burdens of the Bargain, 29 Wake Forest L.Rev. 1101, 1101 (1994) ).
Many years ago in Ward v. Cooke, 17 N.J. Eq. 93, 99 (Ch.1864), the Chancellor held that future advance mortgages are not subordinated except as to advances made after the mortgagee receives actual notice of the subsequent lien or encumbrance. The Chancellor held that constructive notice is insufficient to subordinate the priority of a future advance mortgage. Ibid.
Ward remained unchallenged as the rule in New Jersey until 1982, when the Chancery Division analyzed the effect of recording statutes enacted after Ward in the context of a construction loan. Lincoln Fed. Sav. & Loan Assoc. v. Platt Homes, Inc., 185 N.J.Super. 457, 464–67, 449 A. 2d 553 (Ch.Div.1982). The court in Lincoln Federal held that constructive notice through the recording of a subsequent mortgage would also suffice to give the later mortgage priority where the future advances on the earlier mortgage were optional, not obligatory. Id. at 461–65, 449 A. 2d 553 (citing Mayo v. City Nat'l Bank & Trust Co., 56 N.J. 111, 117, 265 A. 2d 382 (1970) ; Micele v. Falduti, 101 N.J. Eq. 103, 104–05, 137 A. 92 (Ch.1927) ).3
In Cox, supra, 164 N.J. at 525, 753 A. 2d 1112, Justice Stein's concurring and dissenting...
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